What is a Limited Purpose FSA?

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Limited Purpose Flexible Spending Accounts are dedicated specifically to optical and dental care. While similar in usage to both an HSA and a healthcare FSA, this type of account is more specific to what you can use the funds for.

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Flexible Spending Accounts (FSAs) are savings accounts offered through your employer’s benefit program that enable you to save pre-tax money to pay for out-of-pocket medical and dependent expenses (depending on the type of FSA). Limited Purpose FSAs allow you to save money for out-of-pocket dental and vision expenses. The great thing about this is, not only can you pay for said expenses, if you have an HSA, you can keep contributing to it (and thus saving money for retirement), while also contributing to a Limited Purpose FSA.

It is important to note that since you can pay for dental and vision expenses with both your HSA and Limited Purpose FSA, you can’t pay for the same expense from both accounts, you have to pick one or the other.

What Does a Limited Purpose FSA Pay For?

The following is a list of what the IRS defines as “qualified medical expenses” for Limited Purpose FSAs. You can use your savings to pay for these expenses for yourself, your spouse and your dependents:

  • Contacts and solution
  • Braille books and magazines
  • Copays
  • Deductibles
  • Office visits
  • Diagnostic services
  • Non-cosmetic surgery for dental care and reconstruction
  • Dentures and bridges
  • Eye exams
  • Treatments (prescription and over-the-counter)
  • Guide dogs (dog, training, care)
  • Eye surgery (including laser and Lasik)
  • Orthodontia
  • Guards for teeth grinding
  • Glasses
  • X-rays
  • Transportation expenses to receive care

How Do I Deposit Money in My Limited Purpose FSA?

If you want to take advantage of your employer’s FSA offering, you must elect to do so during open enrollment. At that time, you elect the amount you want to save for the year and your employer will then take out the appropriate amount from each paycheck. When choosing the amount you want to save, you need to be aware of the following:

  1. The annual limit the IRS puts on contributions. For the 2020 contribution limit for Limited Purpose FSAs is $2,750.
  2. You can only change your contribution amount if there is a change in your family status. This includes the birth of a child, marriage, a dependent who has aged out of coverage, a parent has recently come under your full-time care, your spouse has lost his or her job and thus you’ve lost protection under their Limited Purpose FSA.
  3. You must use your contributions by the end of the plan year or else risk forfeiting what remains. Your employer has the option to offer you EITHER a 2 ½ month grace period during which to use the remaining funds, OR a $500 rollover of contributions to the following year. If you choose to rollover funds from one year to the next, it doesn’t affect the next year’s contribution limit.
  4. Employer contributions to a Limited Purpose FSA are not included in your annual limit. This means that you can still contribute up to $2,750 into your Limited Purpose FSA, even if your employers choose to help contribute. This is different from other accounts in which employer contributions are counted for a contribution maximum.

How Do I Use my Limited Purpose FSA?

Limited Purpose FSA funds are distributed either with a debit card, if your employer has given you direct access to your money, or via reimbursements. If you have a debit card, you can pay for your out-of-pocket expenses at the point-of-sale. If you weren’t given access to a debit card, or decide not to use it, you can submit the proper documentation to your FSA administrator and they will either mail you a check or direct deposit the money into your account.

What Happens if I Leave My Employer?

Unfortunately, if you leave your job, your remaining Limited Purpose FSA contributions will go to your employer. The only exception is if you are eligible for, and choose to continue contributing to your Limited Purpose FSA via COBRA.

Limited Purpose FSAs are a great benefit that enables you to save pre-tax money to pay for out-of-pocket dental and vision expenses. This allows you to save up to 30% on those expenses (depending on your tax burden) as well as continue saving in your HSA for retirement. As long as you’re aware of the rules and carefully select your annual contribution amount, a Limited Purpose FSA is the perfect way to complete your health benefits coverage.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.